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Since there seem to be some wise posters on this board, I thought I'd ask the question here. As some of you know, we have two young children and we'd like to present them with as much opportunity as possible. I know there are "Texas" college funds out there, but I have no experience as to which ones offer the most benefits.
Now with that being said, this is where we probably differ from most on this board. We want to encourage our sons to go onto college, but we won't make it a said "requirement". My wife and I have done well without full 4 year degrees ourselves, and though we understand the value in a college degree, education, experiences, we know college isn't for everyone. With that being said, we don't want to dump 10-100's of thousands of dollars into a fund that can only be used for college should one or both of our boys decide to not attend college. We also may get extremely lucky and have both of our children land partial or full fledged scholarships.
*Please keep this from being a discussion on whether college is good/bad/needed/etc, and strictly to answering what would be some good funds for us to look into.
Possible Questions:
-Are any of these funds backed with a guaranteed return year after year?
-Do any allow you to cash out in the event of a child not going to or finishing college?
-Do any penalize your kids from going to an out of state college?
-Penalties for attending a community college first?
-Do these funds only cover things like tuition & board(like some scholarships) or can they be used for any expenses needed in college. Car, groceries, clothes, "the library" , etc.
We started a 529 Plan for our son. It's a tax-deferred account with investments that vary by state. The money grows tax free, and there is no tax if money is withdrawn for a qualified educational expense. If you pull it out for anything else, you pay taxes and a penalty on it.
Because Texas has no state income tax, there really isn't any benefit to doing the Texas-based 529 Plan, as it's fairly poorly ranked. You can do the Utah or Maryland plan (two of the highest-ranked ones) and set it up straight through the state and arrange your contributions, or you can do it through a brokerage account if you have one. There shouldn't be any penalty for going to an out-of-state or in-state school.
I went through USAA, whose plan is based in Nevada and only required an initial contribution of $250 to start. It took maybe 10 minutes to set up.
The downside is, as you said, in case of scholarship or not going, you have to pay a penalty to withdraw the money for non-education expenses. Still, with college costing what it does, I'm willing to bet that we will have a good chunk of expenses regardless of scholarship. I believe the definition of "education related expenses" is pretty broad, so it should cover room and board, books, etc.
We are starting to research this as well so Im attaching a summary of my notes so far...
Keep in mind the $$ in a 529 can be transferred to other family members so if one child decides not to attend, you can transfer the funds to the other. If you withdraw the money for an expense other than college (any college, instate or out of state), you pay a 10% penalty and taxes based on your bracket at time of withdrawal. It covers books, tuition, room and board, etc. Different states have different plans. Some offer guarantees, others don't, different minimum starting contributions, fees, etc. They tend to be invested very conservatively so the gains aren't huge but also not very risky.
If you meet the income requirements you can look at the Coverdell as well. It usually goes to the child it was set up for, but depending on the plan, the beneficiary could be changed. Its not a clear thing like the 529. If unspent at the age of 30, the funds go to the child minus the 10% penalty and taxes. There's a contribution limit every year for each child, unlike the 529.You can manage the investments in the Coverdell yourself. You can later transfer Coverdell to a 529, but not the other way around. Funds can also be used for K-12 education if that's a factor.
One other bit about 529's - some states offer (Utah does, which is the state I would recommend going with) automatic investment plans that change as the child ages. So if the kids are 1-2 now, the investments will be very aggressive for maximum growth, and then automatically get more conservative as they get closer to college age.
If I didn't go with USAA's Nevada plan, I would have gone with Utah. They use Vanguard funds and are consistently among the highest-ranked for returns and overall goodness.
My understanding is that if your child earns scholarshiponey hou are allowed to withdraw thst amount w/o penalty.
The benefit to choosing a pre-paid tuition plan is that in a "good" plan the money u use to buy future tuition credits is discounted to your advantage for tuition in future years.
Some states don't really discount their costs but have you paying overly inflated rates so they dont take the hit in 12-18 yrs. Florida's prepaid was like that until recently when governor and legislature rolled back rates.
I think TX prepaid is closed to new accounts.
We opened a Utah account for our grandson this fall funded w/ tax- free gift max.
There is limit on tax free gifts from other sources that your child can receive. 14k from any one individual to any single individual--like grandparent to grandchild.
You can invest maybe as much as u can afford.
Flexiblibity for how u configure account and low fees were why we chose Utah.
New York's 529 plan also is well regarded.
There is web site w good, unbiased info
Forget name but Google it
Has forum for questions and rundown on all plans
We did 529 plans for both of our kids. You can easily change the beneficiary of the plan. Thus, if you have 100k in each kids account, and your first born gets a scholarship, you can move that money to the second child without any issue. Moreover, if neither kid needs it, you can get creative and give it to your grandchild, nephew, etc.
However, there is another potential option. Neither you nor your wife went to college. Lets assume that at age 50 your wife wants to quit working and you want to access the money in the 529 account. You can have her sign up for college classes and use the money for her costs, but also room and board (basically take it out to help cover the mortgage). Check with your accountant though.
We did 529 plans for both of our kids. You can easily change the beneficiary of the plan. Thus, if you have 100k in each kids account, and your first born gets a scholarship, you can move that money to the second child without any issue. Moreover, if neither kid needs it, you can get creative and give it to your grandchild, nephew, etc.
However, there is another potential option. Neither you nor your wife went to college. Lets assume that at age 50 your wife wants to quit working and you want to access the money in the 529 account. You can have her sign up for college classes and use the money for her costs, but also room and board (basically take it out to help cover the mortgage). Check with your accountant though.
Hmmm, good idea there. I'll have to look into that.
Possible Questions: -Are any of these funds backed with a guaranteed return year after year?
-Do any allow you to cash out in the event of a child not going to or finishing college?
-Do any penalize your kids from going to an out of state college?
-Penalties for attending a community college first?
-Do these funds only cover things like tuition & board(like some scholarships) or can they be used for any expenses needed in college. Car, groceries, clothes, "the library" , etc.
If you want a guaranteed return, then you don't want a 529 plan.
The limitations on 529 plans do not outweigh the benefits IMO. The best way to address your questions would be to go with a life insurance policy. You can contribute more, the amount saved doesn't count against you in regard to financial aid, you can withdraw the money without any penalty, for any reason, etc.
Take a look. Honestly, I don't know why anyone would choose the 529 over a structured life insurance policy.
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